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What expenses does a hedge fund pay for?

Question: What costs does a hedge fund pay for and what costs does the hedge fund management company pay for?

Answer: This is another very common question. Most hedge fund offering documents provide a boilerplate approach for splitting costs between the hedge fund and the management company. The general rule of thumb is that any cost which is directly associated with the fund’s investment activities (e.g. brokerage costs) will be paid for by the hedge fund. Any cost which is directly associated with the management company’s operations or overhead (e.g. salaries) will be paid for by the management company.

There are some costs which, arguably, could go either way – one such item is a Bloomberg terminal. A Bloomberg terminal could arguably be an expense of the management company (a Bloomberg is an informational tool similar to magazines and other information that a manager must use to shape its decision-making process) or of the hedge fund (information from the Bloomberg is directly attributable to investment decisions which are made). I do not have a bias as to which entity should pay these fees; however, a hedge fund manager with a smaller asset base that pays for the Bloomberg out of the fund must beware of the effect of Bloomberg’s costs on the fund’s performance.

Hedge Fund Expenses

hedge fund management fee

hedge fund performance allocation

offering and other start-up related expenses (often the management company will pay these expenses)

optional: professional fees (including, without limitation, expenses of consultants and experts) relating to investments

optional: the management company’s legal expenses in relation to the Partnership

optional: advisory board fees and expenses

optional: reasonable out-of-pocket expenses of the management company (such as travel expenses related to due diligence investigations of existing and prospective investments)

other expenses associated with the operation of the hedge fund, including any extraordinary expenses (such as litigation and indemnification)

Hedge Fund Management Company Expenses

offering and other start-up related expenses (often the fund will pay these expenses)

salaries, benefits and other related compensation of the management company’s employees

rent

maintenance of its books and records

fixed expenses

telephones

computers

general purpose office equipment

While the above list of expenses is fairly standard, please remember that these expenses can be switched around to a certain extent. If you are a hedge fund manager, you should discuss with your attorney how the expenses are split between the hedge fund and the management company.